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Published on 7/02/2019 8:55:06 AM | Source: HT Media

ACC`s cost control impressive but not enough to move needle on valuations

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It is said that money saved is money earned. ACC Ltd appears to be living by this maxim. Despite cost headwinds, the cement producer’s key operating expenses on power, fuel and freight did not escalate in the December quarter. In fact, as the alongside chart shows, the company has achieved higher cost-efficiencies on these fronts compared to its peers. Even though the unexpected spike in raw material price did dent ACC’s operating margin growth, its efforts to limit cost increases were a positive.

But considering most cement makers are exploring options to optimize costs, getting a better handle on expenditure is not unique to the company. This also means that improvement on the cost front will not be enough for ACC to shine among peers.

The key upside trigger for shares of all cement firms remains a significant revival in their prices. Given the recent trends in cement prices across India, a sharp recovery still looks some time away.

In the case of ACC, volume growth has to catch up, too. Its domestic cement sales volumes in the December quarter grew 8.4% on a year-on-year basis to 7.5 million tonnes. While this was better-than the Street’s expectations, it still compares poorly with the double-digit growth reported by other large cement makers in the same quarter.

To be sure, ACC’s recently announced expansion plans in Madhya Pradesh, Uttar Pradesh and Jharkhand improve growth visibility as existing plants are already running at about 85% capacity utilization levels.

Since these plants are likely to be commissioned by fiscal 2022, volume growth expectations are muted until then, say analysts.

So, the company is expected to underperform the industry on volume growth in the near term. Until the expansions yield results, the ACC stock may continue to lag peers on valuations.

On an EV/Ebitda basis, shares of ACC are trading at 9.8 times, which is a steep discount compared to 17 times and 20 times of UltraTech Cement Ltd and Shree Cement Ltd, respectively. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization.